The Organisation for Economic Cooperation (OECD) has announced a major reform of the international tax system that has been finalised between 136 countries and jurisdictions, which will see multinationals be subject to a minimum 15 percent tax rate from 2023.
Kenya is not among these 136 countries, having dropped plans to back up the global minimum tax that is being driven by the United States President Joe Biden who wants multinational companies to support the tax deal.
The deadlock is said to be as a result of clauses in the agreement which Kenya has been noted to be uncomfortable with which was to compel Kenya to drop the digital services levy of 1.5 percent of gross sales by U.S leading tech firms such as Google, Facebook and Amazon.
According to experts, Nairobi downplayed to have their support due to a clause that demands countries scrap the hiking famous Digital Services Taxes which will require Kenya to drop its own digital services tax that came into operation early January 2021.
Sale of e-books, movies, games, music and other digital content which applies to foreign companies is levied.
Kenya Revenue Authority (KRA), has so far revealed that the DST could generate up to Ksh.13.9 billion revenue in the next three years.
The report on Kenya withholding support for Biden’s Administration push for the deal was revealed by the Paris Based OECD which hosted talks on the overhaul of taxation rules.
Besides Kenya, other out of the 140 members of OECD countries that have yet to join the agreement are Nigeria, Pakistan, and Sri Lanka.
Nigeria and Kenya are among top African economies that have failed to honour the deal besides Egypt, South Africa and Morocco who are believed to be major African economies that have backed the agreement.
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreement is based on the OECD’s two-pillar approach that aims to ensure multinationals pay their fair share of tax in the countries they operate in.
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Out of 140 members of the OECD/G20 Inclusive Framework on BEPS, 136 agreed to introduce the new tax system.
The two-pillar approach is one of nexus and profit allocation and another of ensuring a minimum level of taxation of at least 15 percent.
Under pillar one, multinationals with global sales above Ksh.2.5 trillion (€20 billion) and profitability above 10 percent will be covered by the new rules, with 25 percent of profit above the 10 percent threshold to be reallocated to market jurisdictions.
Meanwhile, under pillar two, the new minimum tax rate will apply to companies with revenue above Ksh.96 billion (€750 million).
The agreement states that both pillars combined could increase global tax income revenue by Ksh.13.8 trillion to Ksh.16.6 trillion ($125-$150 billion) annually.
“Today’s agreement will make our international tax arrangements fairer and work better,” former Australian Minister for Finance and now OECD Secretary-General Mathias Cormann said.
“This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform.”
Overhauling the international tax system under the agreement was first flagged in July. At the time, 130 countries including China, United States, United Kingdom, Russia, Australia, Brazil, and India had signed up to it.
Since then, Estonia, Hungary, and Ireland have also joined the agreement. The countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023.
United States Treasury Secretary Janet Yellen described the agreement as a “once-in-a-generation accomplishment for economic diplomacy”.
It comes after President Biden laid out in April his corporate tax reform plans, vowing the tax rate in the US would be raised from 21% to 28%..
Australia Treasurer Josh Frydenberg also welcomed the global tax agreement, saying the “significant progress … will help ensure that multinationals pay their fair share of tax in Australia and abroad”.
Australia introduced multinational anti-avoidance laws back in 2016. Under those laws, companies operating with an annual global income of more than AU$1 billion in Australia are required to lodge their general purpose financial statements to the Australian Taxation Office, if they are not already doing so with the Australian Securities and Investments Commission.
The introduction of the agreement follows the footsteps of the G7 nations that agreed in June to introduce a global minimum corporate tax rate of at least 15 percent.
At the time, the G7 finance ministers said the tax rate would be used to target “the largest and most profitable multinational enterprises”, and that they would meet the G20 finance ministers and central bank governors this month to see whether its agreement could gain broader support from other countries.
